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A Conflict of Interest in the Auction World

The Reserve Price Dilemma: A Conflict of Interest in the Auction World

In the high-stakes world of art auctions, reserve prices play a crucial role. They are the confidential minimum prices that sellers are willing to accept for their works of art. If bidding fails to reach the reserve, the piece goes unsold. While reserve prices protect sellers, they also create a potential conflict of interest for auction houses like Sotheby's and Christie's.

Auction houses have a dual role: they represent both the buyer and the seller. They earn commissions from the seller, but also advise buyers. This dual agency can lead to conflicts. When setting reserve prices, auction houses may prioritize their own interests over those of their clients.

On one hand, setting high reserve prices can increase potential earnings for the auction house. If bidding reaches the reserve, the house earns a higher commission. However, overly high reserves can deter bidders, resulting in unsold lots. This reflects poorly on the auction house and may deter future consignments.

On the other hand, setting reserves too low can guarantee a sale but reduce the auction house's earnings. While this ensures a successful auction, it may leave money on the table for the seller.

Transparency is key to mitigating this conflict. Auction houses should clearly communicate the reserve-setting process to sellers. They must balance their own interests with their fiduciary duty to clients.

The reserve price system, while flawed, is integral to the auction process. With careful management and open communication, auction houses can navigate the inherent conflict of interest and maintain the trust of their clients.


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